CCS Demonstration in Developing Countries

Priorities for a Financing Mechanism for Carbon Dioxide Capture and Storage

This working paper explores some of the key issues emerging around the effective financing of carbon dioxide capture and storage (CCS) demonstration projects in developing countries. It presents a series of options and recommendations to international policymakers and agencies working to support CCS development in a non-OECD context.

Executive Summary

Climate Change and CCS

In facing the challenge of mitigating global climate change, world leaders have
acknowledged that no single solution exists, and therefore, a portfolio of carbon
dioxide (CO2) reduction technologies and methods will be needed to successfully
confront rising emissions. Due to their dependency on fossil fuels, the energy
supply and industrial sectors are the greatest contributors to CO2 emissions,
accounting for 25.9 percent and 19.4 percent of the total respectively.

In addition to efficiency improvements and enhancing clean energy use,
one key option for limiting future CO2 emissions from fossil fuel energy use
is carbon dioxide capture and storage (CCS). CCS is a suite of technologies
integrated to capture and transport CO2 from major point sources to a
storage site where the CO2 is injected down wells and then permanently
trapped in porous geological formations deep below the surface. Candidates
for CCS technology include fossil fuel power plants; steel, cement,
and fertilizer factories; and other industrial facilities.

CCS in Developing Countries

Despite often-aggressive programs to promote energy efficiency and deploy
nuclear, renewable, and other low-carbon energy sources, many developing
countries will still rely heavily on fossil fuel energy to power their development
for decades to come. There is therefore a need for developing countries
to create strategies that address fossil fuel emissions in a way that minimizes
the costs of doing so, and consequently minimizes impacts to their national
development goals.

CCS is currently the only near-commercial technology proven to directly
disassociate CO2 emissions from fossil fuel use at scale. Its deployment
could potentially allow developing countries to gradually shift away from
fossil fuels for energy and industrial needs with relatively little disruption
to their long-term development strategies. If deployed as an interim
measure, it could allow time for other alternative low-carbon technologies to be developed and deployed, permitting fossil fuels to be
gradually phased out. This strategy could assist developing
countries to transition to a low-carbon economy in the next
15–50 years.

While CCS is potentially attractive to some developing
countries, there has been limited development of demonstration
projects in Africa, Asia, or Latin America due
mainly to their high cost in the absence of expected profits
or significant carbon financing. The International Energy
Agency (IEA) estimates the total cost for a new average-sized
coal-fired power plant that captures up to 90 percent
of its CO2 emissions to be US$1 billion over 10 years.

Existing financing for CCS is grossly insufficient to enable
demonstration projects in developing countries. The few
available funds are either spread over the full array of
low-carbon technologies, or fall short of the magnitude or
the mandate needed to propel commercial-scale CCS
demonstrations forward. Current carbon offset mechanisms
are not sufficient to spur CCS deployment in developing
countries in today’s context either. Overall, existing CCS
financing mechanisms help grow capacity, but their support
is insufficient to leverage enough funding from capital
markets to implement projects in a non-OECD context.

The IEA CCS Roadmap proposes 50 CCS projects in developing
countries in the next 10 to 20 years. As well as reducing the
developing world’s greenhouse gas emissions, accelerating CCS
demonstration efforts in non-OECD countries can likely also
improve technologies, increase efficiency, reduce uncertainty
and risk, and initiate learning-by-doing at a lower cost than would be possible in OECD countries. The captured benefits
from doing so will be more significant the sooner acceleration
in CCS development in developing countries begins.

About this Paper: Topics of Discussion for Financing CCS in Developing Countries

This paper seeks to promote the effective deployment of
CCS demonstration projects in developing countries. Aimed
at international policymakers and agencies engaged in CCS
funding and deployment negotiations and discussions, the
paper explores some of the key issues emerging around this
critically important topic, and it presents a series of options
and recommendations to international policymakers. WRI’s
aim is to assist the initial design of an effective approach for
financing CCS demonstration projects in developing
countries over the next 10 years. Below is a summary of the
key topics and options explored in the paper.

Table of Contents

Topic 1: Aims of Financing CCS Demonstrations in Developing Countries

The main goal for developed countries to provide financing
for early-stage CCS demonstrations in developing countries
should be to support non-OECD countries in fulfilling their
share in global climate change mitigation efforts.

A financing mechanism for CCS in developing countries
should aim to foster tangible CO2 emission reductions
through a clear focus on storage goals. The level of
ambition for CO2 storage should support current CCS
deployment requirements in developing countries. While
it is impossible to objectively ascertain what proportion of
this total a dedicated OECD country–funded CCS
financing mechanism should support, it is evident that
developing countries will need support for a significant
share of these projects.

Implementing CCS demonstrations that lead to the storage
of 45–60 million tons carbon dioxide (MtCO2) over 10
years could significantly spur the research and deployment
rates needed for CCS development to take off in
developing countries.

Topic 2: Eligible Costs for Financing

Most CCS demonstration projects will operate in conjunction
with new or existing power plants or industrial
facilities that may also function without the technology.
Funding for CCS demonstrations can therefore be structured
around whole projects—including the non-CCS
components of the facility under consideration—or just the
specific CCS components that would enable the facility to
effectively capture and store its carbon dioxide emissions.

Funding should only be eligible to finance incremental
costs incurred as a result of CO2 capture, transport, and
storage efforts—not the full cost of the project.

Project scales and types: To maximize both near-term and
future storage, eligible project types should cover geological
site characterization and integrated CCS projects, both
at the pilot and commercial demonstration scales.

Project sectors: CCS projects in fossil fuel power plants
are likely to be the largest recipients of funding. However,
some industrial CO2 sources may present advantages that
could facilitate timely and cost-effective development of
CCS projects in developing countries. “Low-hanging
fruit” projects in industrial facilities with high-purity CO2
streams can advance infrastructure and technologic
know-how in developing countries at a fraction of the cost
of implementing CCS at a power plant. Funding criteria
should therefore not discriminate against industrial
sources of CO2.

EOR and other CCUS projects: Enhanced oil recovery
(EOR) and other carbon capture, usage and storage
(CCUS) projects have multiple advantages for early CCS
development and can result in the net storage of CO2,
warranting their inclusion in financing opportunities.
However, awarding of CCS financing to CCUS projects
should occur only where projects are managed and
monitored with the aim of permanent CO2 storage.

Additional project requirements: Funding criteria should
stipulate that awarded projects employ sound procedures
for CCS site selection, operation, and stewardship. Site
selection must be based on specific geologic characteristics.
Awarded projects must also have monitoring plans in place for both the operational and the post-closure
stewardship phase and ideally demonstrate local government
support and local community buy-in.

Topic 4: Project Selection Process

In order to make the selection process as equitable and
objective as possible while maximizing CCS deployment
goals, projects that meet funding demonstration objectives
should be awarded on a competitive basis under a
points-based system to judge applications. Such system
should reward, among other factors, storage efficiency,
geographic diversity, and contribution to wider CCS
advancement in developing countries.

The selection system should also favor improving
knowledge of storage opportunities through projects
implemented in deep saline formations, since they
represent the largest knowledge gap and the largest
storage potential in the future.

Topic 5: Financing Mechanism Characteristics

Significant attention has been focused on creating an
international public fund solely dedicated to CCS, or a
CCS window within a larger fund that may also finance
other pre-commercial, low-carbon technologies in
developing countries. Additional research is needed to
ascertain the pros and cons of different structures in a
developing country environment. However, there are
several advantages of adopting a CCS-only mechanism
for the early demonstration phase, instead of having CCS
in direct competition with other technologies for the same
pool of funds.

In order to meet the IEA-recommended storage goal of
45–60 million tons of CO2 in 10 years, a CCS fund needs
to be able to invest or leverage total investments of US$5–
8 billion and have the capacity to disburse its resources
effectively over the same period.

A CCS fund should employ strong early-mover and CO2
storage incentive provisions to leverage its goals. A 10-year
storage incentive on a rising scale could be applied to ensure
project operators act to permanently reduce emissions.